End of an era as Mastermind Tobacco to go under the hammer

Assets owned by Mastermind Tobacco are set to be auctioned in January in what could mark the end of an era for the tobacco manufacturer.

The tobacco firm, which was started more than three decades ago by the late billionaire Wilfred Murungi, has weathered numerous storms, including with its key competitor - British American Tobacco (BAT) - as well as with the Kenya Revenue Authority (KRA) over unpaid taxes.

It also claims illicit trade has threatened its operations. 

But it is the fight with one of its lenders over an undisclosed debt that appears to have done it in, leading to the planned auction. 

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In December last year, I&M Bank put the firm in administration over an undisclosed debt that the cigarette maker had defaulted on. 

“Notice is given that Ponangipalli Venkata Ramana Rao and Swaroop Rao Ponangipalli… have been appointed as administrators of Mastermind Tobacco (K) Ltd (under Administration), effective from the 14th December, 2023. Following the appointment, all the affairs and business of the company are being conducted by the administrators. The powers of the administrators extend to all assets and undertakings of the company. The powers of the directors in terms of dealing with the company’s assets ceased,” said the administrators in a public notice through the Kenya Gazette on December 20, 2023.

At the time, there were reports indicating that the firm had issued notice of termination of contracts to its over 1,000 employees. It was also reported that the firm had stopped production at its factory in Syokimau. 

Should the auction go on as planned, it might spell the end for one of the few local firms that have taken on multinationals and succeeded before the onset of its financial woes.

The late Murungi learnt the craft from the global tobacco firm BAT before leaving to start his own enterprise. 

He first worked as an engineer with BAT before quitting as technical director to set up Mastermind Tobacco in the late 1980s.

Mastermind launched its flagship Supermatch brand in 1989 and two years later, in 1991, launched Rocket, its filterless cigarette.

The firm has through the years had run-ins with the taxman over unpaid taxes. 

The firm joins the list of many firms that tend to die with their founders. Mr Murungi died in June 2019 and was interred in a private ceremony that got tongues wagging.

The private ceremony allegedly saw some relatives who had not been invited to the burial turned away.

During the 30-plus years that the firm has been in existence, the firm had to constantly fight off auctioneers.  

Among the latest in the series of long-running legal battles, the taxman was demanding Sh517.76 million in unpaid taxes from Mastermind, which the firm lost in an October court ruling.

KRA in 2016 had demanded Sh90.23 million in unpaid value-added tax and a further Sh427.5 million on account of selling in the local market cigarettes that were meant for exports, also known as dumping.

According to KRA, the cigarettes were classified as exports and hence zero-rated, but Mastermind failed to provide proof of exports for the consignments.

The company objected to the KRA’s demand in 2018 but lost the case at the Tax Appeals Tribunal, which gave KRA the go-ahead to collect the Sh517.73 million in April 2020. Mastermind appealed at the high court, but the court recently ruled in KRA’s favour.

KRA has on several occasions sent auctioneers to the firm’s premises, but perhaps the one that caught the public’s attention was the Sh4.5 billion demand in 2012.

The matter made it to the floor of Parliament when one Member of Parliament claimed the firm had sought protection from a high-ranking government official from harassment from KRA.

In 2018, Mastermind sued KRA over a Sh1.9 billion tax demand that the taxman said was in the form of unpaid excise duty, VAT and Pay As You Earn (Paye).

The firm has also previously accused its key competitor in Kenya, BAT, of price undercutting in a move that it claimed was aimed at driving it out of business. 

In 2015, there were claims of corporate espionage by BAT on Mastermind, which the former denied.

In 2019, Mr Murungi was reported to have been in talks with Philip Morris, one of the world’s largest tobacco companies for the acquisition of a 51 per cent stake in Mastermind.

The deal would see the international tobacco firm inject capital into Mastermind for the upgrade of its Syokimau-based plant.

It was also expected that the firm would start production of some of its cigarette brands such as Marlboro locally. This was expected to give Mastermind a firm footing in its fights with BAT Kenya for market share in Kenya and the region.

Other than the intense battles with competition and the taxman, the firm and generally the industry has evolved from a time when its customers could freely light up on the streets, restaurants and even homes – oblivious of the dangers of smoking – to today when tobacco control regulation has grown to a point that cigarette smoking is not only frowned upon but highly controlled.

Some markets are implementing laws that ban the sale of cigarettes to younger populations. 

Away from fights with competition and the taxman, Mastermind Tobacco has also borne the brunt of the illicit tobacco trade that still threatens the industry today.

Sometime last year, the firm said the local market is flooded with illicit products, with up to 80 per cent of products bearing the name of its flagship brand Supermatch being smuggled into Kenya from neighbouring Uganda.

The company at the time asked the government to establish strong border control measures that would curtail the entry of illicit products into the country.

“We are also asking the government to crack down on traders and dealers engaged in the import of illicit cigarettes into the country and take legal action on them,” said the firm in a statement.

A past survey by BAT showed that the country loses up to Sh6.5 billion annually in taxes as a result of the influx of illicit cigarettes being sold in the local market, assertions that Mastermind agrees with.

Mastermind at the time warned that if the illicit trade was not curtailed, the tobacco industry in the country faced a difficult future and possibly even shut down and, in turn, a massive loss of jobs.

“We are concerned at the growing level of illicit cigarettes making their way into the country, especially from Uganda,” Mastermind said.

“We are the biggest losers in the market because when we have 80 per cent of illicit products bearing the name of our product and are sold cheaply in the country, we will not be able to compete.”